A key executive has left HighTower Advisers, leaving a management hole, at least temporarily, at the top of one of HighTower's most important new business lines.

Mike Papedis, a managing director and head of RIA acquisitions for HighTower, will start his own consulting and recruiting firm and HighTower will be a client, a company spokeswoman says.

“We are pleased to support the launch of Mike’s new business and wish him great success,” says Elliot Weissbluth, HighTower's CEO. Papedis, a seven-year HighTower veteran, could not be reached for comment. HighTower has not announced a successor to Papedis.

Launched in 2015, RIA acquisitions have supplemented HighTower's equity partnership and platform outsourcing business, bringing the company a "very high" return on capital, Weissbluth says, without being more specific.

STRATEGIC SHIFT
HighTower Advisors initially focused on building up its equity partnership business, attracting 36 large breakaway wirehouse teams from 2008 to 2012, offering approximately 50% in cash for the value of the firm and the remaining half in company equity.

The company shifted gears in 2013 and began offering a suite of middle and back-office services as a platform provider to breakaway broker teams and existing RIAs for 15% of their revenue.

Quote
"[Buying an RIA] is a much more attractive proposition," says HighTower CEO Elliot Weissbluth.

Two years later HighTower, which is owned by HighTower Holding, also the parent company of broker-dealer HighTower Securities, launched a new business line headed by Papedis: it began to buy mid-sized RIAs outright, staking a serious claim to be a major player in the highly competitive RIA M&A arena.

'100% OF EARNINGS'
In 2016, HighTower acquired four firms, with assets averaging around $500 million or less. Altogether, it has made a total of five acquisitions in two years; the new HighTower RIAs have approximately $2 billion in combined assets.
And that's just the beginning, vowed Weissbluth in an interview before the departure of Papedis was announced.

The company sees itself as a "serial integrator" on track to buy approximately five RIAs every year in a fertile market, he says, citing industry statistics identifying approximately 14,000 advisory firms as potential sellers.

"If I buy an RIA, 100% of the earnings lands on my income statement right away," Weissbluth explains. "[Bringing on a wirehouse team], I have until the accounts transfer which may take a year. I have to subsidize their staff until the clients show up and help them with capitalization. I could lose money for a year. If I buy an RIA, they are already fully capitalized, paying their staff and have the earnings to support it. From a simple economic perspective, it's a much more attractive proposition."

FORMIDABLE COMPETITION, BUT GOOD ODDS
HighTower faces formidable competition and Papedis' departure won't make things easier.

Focus Financial, United Capital and AMG Wealth Partners are established, well-funded aggregators. What's more, an increasing number of large RIAs are also intent on growing by acquisitions, including Aspiriant, Beacon Pointe, Carson Wealth Management, Mariner Wealth Advisors, Mercer Advisors and Savant.

Nonetheless, HighTower is well positioned, says M&A expert David DeVoe.

"Today's RIA M&A environment plays well into HighTower's strategy to acquire RIAs," according to David DeVoe, a San Francisco-based M&A consultant and investment banker. "A company like HighTower can provide an RIA with many benefits of scale: best-in-class technology, fewer compliance headaches, access to greater product and services, a national brand.

"Historically, these have not been key decision drivers for a seller," DeVoe notes, "but in today's environment these characteristics can influence the choice of who an RIA partners with."

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Charles Paikert

Charles Paikert

Charles Paikert is a senior editor at Financial Planning. Follow him on Twitter at @paikert.